Transnational Business Law

PROF. LUCA BOGGIO

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24.9.2018 – Lesson 3 Introduction

Once investigated the sources, the second step to understand the transnational financial regulations is the knowledge of the object of these regulations – that is, concerning the financial system, the most common kinds of securities offered and negotiated in the markets – and the structure of the deals related to that object.

Taking into account that we have to focus on bonds and, in particular, on the non-payment of bonds due to issuer insolvencies, this lesson focuses synthetically on the main legal aspects of bonds and on the steps of their issues.

The apparent simplicity of the securities issued conflicts against the complexity of bond issue arrangements. Only when we know the role of each financial actor in a bond issue, we can really understand how and why security laws regulate some specific aspects of the issues or provide the involvement of certain.

financial players in the management of some specific situations (i.e.: the IOSCO key principles for financial regulations establish many tasks for a many financial market players)

PROF. LUCA BOGGIO 124.9.2018 – Lesson 3 Introduction

The investigation of the key principles drawn by some transnational financial institutions – like the WB, the IOSCO, etc. – to increase the quality of the financial market governance help us to better understand the guidelines of the actual regulations as well as those in elaboration, because all the legislations are in status of permanent reform trying to fight against the unpredictable and speedy changes of the needs of financial market "users" or against their new (dangerous) behaviours as well as changes of the dynamics of the markets (the end 90's crises have been generated in or by the developing countries – Russia, Asia, South America – while the 2007-2008 crisis in and by the most advanced ones)

It is important

To remember that the nature of the key principles makes them able better than more specific rules provided by the international or the domestic regulations to satisfy the always changing needs (needs change because of the new interests rise in the financial markets). Guidelines and principles, being soft law "tools", are more flexible and cross easier the borders. Anyway, these principles need permanent monitoring and revising actions too.

PROF. LUCA BOGGIO 224.9.2018 – Lesson 3

The main kinds of securities

PROF. LUCA BOGGIO 324.9.2018 – Lesson 3

The main kinds of securities

Most traded securities:

• Corporate Shares
• Corporate Bonds
• Asset-backed securities or ABS
• Certificates
• State Bonds

PROF. LUCA BOGGIO 424.9.2018 – Lesson 3

The main kinds of securities

Corporate Shares: they represent the ownership in a specific company, normally giving a right to participate in the decisions of the company and a right to a dividend, if the company

Corporate Stocks: stocks represent ownership in a company. When a company makes profits, they are divided into a number of stock shares, with each share representing a tiny fraction of the company.

Corporate Bonds: bonds are securities that represent the rights of an investor towards an issuing company. They involve a loan of a certain amount of money to the company for a specific number of years. In return, the company is obliged to pay interest to the bondholder periodically at a specified rate.

Certificates: there are various types of certificates, but one popular type is the Certificate of Deposit (CD). CDs are similar to savings accounts as they are insured and virtually risk-free. However, CDs have a specific fixed term and usually a fixed interest rate. They are intended to be held until maturity, at which time the money can be withdrawn along with the accrued interest.

Other types of certificates include Collateral-Trust Certificates and...

Preorganization certificates or subscriptions, the Certificates of interest or participation in profit-sharing agreements, etc.)

PROF. LUCA BOGGIO 5.24.2018 – Lesson 3

The main kinds of securities

Derivatives: they are securities with a value that is reliant upon or derived from an underlying asset or group of assets. The derivative itself is a contract between two or more parties based upon the asset or assets. Its price is determined by fluctuations in the underlying asset (the most common underlying assets include stocks, bonds, commodities, currencies, interest rates and market indexes; originally, derivatives were used to ensure balanced exchange rates for goods traded internationally, while today derivatives are based upon a wide variety of transactions and have many more uses).

Sovereign Bonds: they are issued by a national government or other public entities (e.g. municipalities), generally providing to pay periodic interest and to repay the face value on the maturity date (they are)

PROF. LUCA BOGGIO 624.9.2018 – Lesson 3

The main features of bonds

• A "bond" is:
• A security (namely, a document - material or electronic - in which the right to be paid is legally incorporated)
• Debt (namely, the underlying relationship between issuer and bondholders is a loan)
• Part of a whole (that is, all the bonds issued together represent together the entire loan)
• Backed by all the debtor's assets
• Transferable in the market
• A bond may provide the bondholder's right to receive the payment of a fixed or indexed interest

PROF. LUCA BOGGIO 724.9.2018 – Lesson 3

The main features of bonds

• Categories of bonds
• Straight Fixed Rate Debt: they are the vast majority of new international bonds

are bondswith a specified coupon rate and maturity and no options attached

Floating-Rate Notes: bonds with a interest rate that can vary before the maturity date due to thevariation of an index

Zero Coupon Bonds: Zeros are sold at a discount price from their face value without cash flowuntil their maturity

Dual-Currency Bonds: basically, a straight fixed-rate bond with interest paid in one currency andprincipal in another currency

Composite Currency Bonds: they are denominated in a currency basket, like the ECUs instead ofa single currency

Next pageàPROF. LUCA BOGGIO 824.9.2018 – Lesson 3

The main features of bonds

Categories of bonds

Equity-Related Bonds:

convertible bonds: investors can exchange each bond for a predetermined number of equityshares of the issuer and they are usually willing to accept a lower coupon rate of interest than thecomparable straight fixed coupon bond rate, because they find the conversion option

attractive Ø bonds with equity warrants: investors keep their bond but they are allowed to buy, according to a call option, a specified number of shares in the firm of the issuer at a specified price over a predetermined period of time

PROF. LUCA BOGGIO 9.24.2018 – Lesson 3 International bond issue

PROF. LUCA BOGGIO 10.24.2018 – Lesson 3 International bond issue

Why to issue bonds on the international markets?

An offshore issuance allows lenders to avoid language, cultural, legal differences and enforcement difficulties (because investors can buy in their domestic markets; so, at the end, they enjoy major returns on capital they invested, saving various expenses)

Issuer’s offers can better represent a way to diversify investments on markets other than the domestic one International bonds tend to be larger in size, longer in maturity and low rates (because foreign investors are able to purchase minor currency risk separated to a large degree from credit risk)

international or offshore issue allows borrowers to raise money in the markets paying lower returns on capital (so, issuer can reduce interest rates)

PROF. LUCA BOGGIO 1124.9.2018 – Lesson 3 International bond issue

Structure of a bond issue

The structure and terms of a bond issue can vary considerably depending on the financing needs of the borrower. The stages in any bond issue are broadly the same whatever the complexity of the particular transaction. The main documents used are common to most bond issues. Bonds are often issued according and governed by the US or England & Wales laws.

PROF. LUCA BOGGIO 1224.9.2018 – Lesson 3 International bond issue

The steps of bond issues (in chronological sequence according to London Stock Exchange Market Practice)

1. Pre-launch
2. Launch and roadshow
3. Issue (signing and closing)
4. Post-issue

PROF. LUCA BOGGIO 1324.9.2018 – Lesson 3 International bond issue

Timetable of a bond issue

The timetable of bond issues can vary from a few days to

several months depending, for example,on:

• The peculiarities of parties (whether the issuer is a first-time issuer or not; sovereign or private;listed or not; etc.)
• The complexity of the securities (ordinary bonds, ABS, etc.)
• The complexity of the terms and conditions of the loan agreement (e.g. the structure of thecollateralizations)
• The kind of the secondary market (whether and where the bonds are to be listed)
• The jurisdictions of where are the seats of the the parties (issuer, arrangers, syndicated banks,etc.)

PROF. LUCA BOGGIO 14/24/9/2018 - Lesson 3

International bond issue

Pre-launch First preliminary step (internal to the issuer)

To consider which type of bonds could be issued and how to structure the issue, the issuer needs to ensure that:

• There aren't domestic or foreign laws banning, avoiding or limiting the issue
• The issue is within the powers of the issuer as set out in its memorandum and articles

ofincorporationØThere are no borrowing restrictions in agreements to which the issuer is a partyØThe issuer can be asked to give a negative pledge in an acceptable form (that is, an undertakingthat the issuer will not create security for other indebtedness or, more narrowly, for other bondissues)ØThe issuer may need to call a board meeting to approve the issueØIf the issuer is a participated company and the bond issue is to be guaranteed by the parentcompany, the point mentioned above have to be checked by the parent company

PROF. LUCA BOGGIO 1524.9.2018 – Lesson 3International bond issuePre-launch Second preliminary step (still internal to the issuer)The issuer has to decide:◦ Which type of bonds to issue:◦ Bearer (Bonds were traditionally issued in bearer